Cutting and Grooving Aluminium Composite Panels Is Not Manufacture, Supreme Court Rules
A bench of Justices Pardiwala and Mahadevan holds that adapting ACPs to building dimensions does not produce a distinct product attracting excise duty.
The Supreme Court has held that a construction contractor who cuts imported aluminium composite panels (ACPs) to size, grooves their edges, and fixes them onto building facades does not thereby “manufacture” goods within the meaning of Section 2(f) of the Central Excise Act, 1944. The Court allowed the appeal of M/S Alupro Building Systems Pvt. Ltd, set aside the judgment of the High Court of Karnataka dated 1 April 2010, and restored the order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The judgment, authored by Justice J.B. Pardiwala and decided with Justice R. Mahadevan, also settles a jurisdictional question: appeals on excisability of goods lie before the Supreme Court under Section 35L, not before the High Court under Section 35G, and the 2014 amendment that made this explicit was always clarificatory and retrospective.
How the Dispute Reached the Court
Alupro is a construction contractor that affixes ACPs on the exterior facades of buildings. ACPs are composite products — a rigid polyethylene core bonded on both sides with aluminium sheets, often pre-coated with a fluorocarbon coating for weather resistance. The company imported pre-coated ACPs in standard sizes from foreign manufacturers, classifying them under Customs Tariff Heads 7606/7610 and paying applicable customs duties.
After import, Alupro cut the panels into rectangular or square shapes to match building design requirements, then grooved the reverse face to allow mechanical fixing. The cut and grooved panels were taken to site, fixed onto frames using angles, clamps, and fasteners, and the gaps between adjacent panels were sealed with sealant.
Before April 2002, Alupro had been paying excise duty on the cutting and grooving activity. It then stopped, taking the position that the process did not amount to manufacture under Section 2(f). A show cause notice dated 14 September 2004 demanded duty of Rs. 21,46,437 on ACPs cleared between April 2002 and December 2003, along with interest and penalties. The Additional Commissioner confirmed the demand. The Commissioner (Appeals) upheld the finding of manufacture but set aside the penalty and interest. CESTAT, by its order dated 27 June 2006, allowed Alupro's appeal, holding that the Revenue had not discharged its burden of proving marketability and that no new product had come into existence.
The Revenue appealed to the High Court of Karnataka under Section 35G of the Act. The High Court framed a question of law and answered it in favour of the Revenue, holding that cutting, grooving, and routing of ACPs produced a new product commercially different from what had been purchased. It set aside the CESTAT order and restored the Commissioner (Appeals) order. Alupro then approached the Supreme Court.
The Jurisdictional Question: High Court or Supreme Court?
Before reaching the merits, the Court addressed whether the High Court had jurisdiction at all. Section 35G permits appeals to the High Court from CESTAT orders on substantial questions of law, but expressly excludes orders relating to “the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment.” Section 35L(1)(b) channels such orders directly to the Supreme Court.
The Court held that the word “any” in the exclusionary bracket of Section 35G gives the exclusion a wide sweep, and the phrase “among other things” signals that the listed categories are merely illustrative. The phrase “for purposes of assessment” qualifies both limbs — rate of duty and value of goods — and requires the question to go to the root of the assessment itself, not merely touch rate or value in the abstract.
The Court rejected the argument that excisability is a pure question of law distinct from rate of duty. Excisability is a precursor to the determination of rate of duty for assessment purposes. The two are sequentially and logically interdependent. A decision on excisability has consequences not merely between the parties but across all assessees dealing in the goods in question, making uniformity through a single appellate forum a legislative necessity.
The Court found that the CESTAT's order dealt solely with the excisability of the goods. The Revenue ought to have appealed directly to the Supreme Court under Section 35L. The High Court lacked jurisdiction.
The 2014 Amendment to Section 35L Was Clarificatory and Retrospective
Sub-section (2) of Section 35L, inserted by the Finance (No. 2) Act, 2014, expressly provides that “the determination of any question having a relation to the rate of duty shall include the determination of taxability or excisability of goods for the purpose of assessment.” The Court examined whether this amendment was clarificatory and therefore retrospective.
The Court noted that the Notes on Clauses to the Finance (No. 2) Bill, 2014, and the Memorandum of the Central Board of Direct Taxes both described the insertion as a clarification. The Ministry of Finance also issued a circular to the same effect. The Court held that the amendment does not create a new right of appeal, vest new jurisdiction in any court, impose new obligations on assessees, or alter assessment procedure. It merely makes explicit what was always implicit in the combined reading of Sections 35G and 35L.
The Court relied on its earlier decisions in CIT v. Podar Cement (P) Ltd., M. Rajendran v. KPK Oils & Protiens India (P) Ltd., and University of Kerala v. Merlin J.N. for the principle that declaratory and clarificatory amendments operate retrospectively. The Full Bench of the Bombay High Court in CCE v. Reliance Media Works Ltd. and the Punjab & Haryana High Court in Commr., S.T. v. DLF Golf Resorts Ltd. had reached the same conclusion, and the Court agreed with that reasoning.
The phrase “shall include” in sub-section (2) denotes an inclusive and expansive clarification of an existing expression, not the addition of a new category. The amendment, the Court held, operates retrospectively.
Whether Cutting and Grooving ACPs Amounts to Manufacture
The Court then addressed the merits. Section 2(f) of the Act defines “manufacture” to include any process incidental or ancillary to the completion of a manufactured product, or specified processes in the Schedule. The taxable event for excise duty is manufacture. To establish excisability, two cumulative tests must be satisfied: first, whether the process results in distinct goods with a new identity, character, or use (the transformation test); and second, whether the transformed goods are marketable as distinct goods (the marketability test).
The Court traced the two-fold test through the Constitution Bench decision in Union of India v. Delhi Cloth & General Mills Co. Ltd. (1962), which held that manufacture means bringing into existence a new substance, not merely producing some change. It then examined Union of India v. J.G. Glass Industries Ltd. and Servo-Med Industries (P) Ltd. v. CCE, which together require both transformation and marketability to be established cumulatively. The Court also referred to Quippo Energy Ltd. v. CCE for the clarification that the “but for the process” test is not a sufficient assessment on its own to establish manufacture.
Applying the first limb to the facts, the Court found the answer “an emphatic No.” What enters the process is an ACP consisting of two aluminium sheets bonded to a polyethylene core. What emerges is still an ACP, cut to a particular size, grooved at the edges, and bent into a frame. The essential character of the goods remains entirely unchanged. Cutting adapts the dimensions of the panels to the requirements of a specific building. Routing prepares the reverse face for mechanical fixing. Grooving facilitates bending and joining at the edges. These are preparation, sizing, and installation activities, not manufacturing.
The Court drew support from Bharat Forge and Press Industries (P) Ltd. v. CCE, where pipe fittings made by cutting and shaping steel pipes were held not to be a distinct product from pipes and tubes. It also relied on CCE v. S.R. Tissues (P) Ltd., where cutting jumbo rolls of tissue paper into table napkins and toilet rolls was held not to amount to manufacture because the characteristics of the tissue remained the same. In Aman Marble Industries (P) Ltd. v. CCE, cutting marble blocks into slabs was held not to produce a new substance. The Court also referred to the Madhya Pradesh High Court's decision in Bheraghat Mineral Industries v. Divisional Deputy Commissioner of Sales Tax, where crushing dolomite lumps into chips and powder was held not to produce a different commercial commodity.
The Court held that the test of whether a distinct product has come into existence is not a test of physical transformation alone. The question is whether the goods could be regarded as different goods commercially. A piece of cloth cut into various shapes remains cloth. The location at which the process is carried out — here, the appellant's premises — does not elevate the activity to manufacture. Giving specifications for cutting also does not make an assessee a manufacturer.
Marketability: Revenue Failed to Discharge Its Burden
Although the Court found the transformation test was not satisfied and the marketability question therefore did not strictly arise, it addressed the second limb for completeness. The burden of establishing that the goods emerging from the process are marketable as distinct goods lies on the Revenue. This burden must be discharged by evidence, not by assertion or the mere fact that a process has been undertaken.
The CESTAT had found that the Revenue produced no evidence of trade parlance or market understanding that cutting and routing ACPs brings into existence a new product known in the market. The Court endorsed this finding. It referred to a line of decisions — including CCE v. Ambalal Sarabhai Enterprises (P) Ltd., CCE v. United Phosphorus Ltd., Hindustan Zinc Ltd. v. CCE, Gujarat Narmada Valley Fertilizer Co. Ltd. v. Collector of Excise & Customs, and Cipla Ltd. v. CCE — each of which held that the Revenue failed to prove marketability where it relied on assertion, dictionary entries, or chemical directories without adducing actual market evidence.
The Court held that the standard of proof is preponderance of probabilities, calibrated to the nature and rarity of the goods in question. For common goods, the degree of probability required is correspondingly higher. The conclusion on marketability must flow from evidence, not from the fact that a process has been undertaken.
Outcome
The Court summarised its conclusions: appeals on excisability lie before the Supreme Court under Section 35L, not before the High Court under Section 35G; excisability is a precursor to rate of duty for assessment purposes; sub-section (2) of Section 35L is clarificatory and retrospective; superficial changes that do not alter the fundamental properties of goods do not satisfy the transformation test; and the burden of proving marketability lies on the Revenue and must be discharged by evidence proportionate to the goods in question.
The appeal was allowed. The impugned judgment of the High Court of Karnataka dated 1 April 2010 was set aside. Pending applications, if any, were disposed of.